Xerox has gotten torched over the last six months - since October 2024, its stock price has dropped 60.1% to $4.06 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Xerox, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Even with the cheaper entry price, we're swiping left on Xerox for now. Here are three reasons why there are better opportunities than XRX and a stock we'd rather own.

Why Do We Think Xerox Will Underperform?

Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ: XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Xerox’s demand was weak over the last five years as its sales fell at a 7.3% annual rate. This wasn’t a great result and is a sign of poor business quality.

2. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Xerox’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Xerox’s $3.40 billion of debt exceeds the $576 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $503 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Xerox could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Xerox can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Xerox falls short of our quality standards. After the recent drawdown, the stock trades at 3.1× forward price-to-earnings (or $4.06 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

Stocks We Would Buy Instead of Xerox

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